Software AG charts cautious course in China

Why go slowly? "You can burn a lot of money in China very fast," a top executive says.

28 September 20045:46 pm BST

Most technology companies are looking at China as a burgeoning revenue hot spot, but Germany's Software AG is playing it cool about growth prospects in the mainland.

Unlike larger competitors such as IBM, which have a long-established footing in the country, Software AG--which specializes in database software and XML-based integration tools--won't open its flagship office in China until later this year.

To be based in Shenzhen, near Hong Kong, the office will be partly operational by November, with full operations commencing in January.

"We are investing $1 million in China in this first phase, but this (investment) will increase over time. We want to be careful, as you can burn a lot of money in China very fast," said Andreas Zeitler, a member of Software AG's executive board.

Zeitler heads the company's Region Central/Asia business division, one of three newly created geographic groupings covering Eastern and Central Europe, the Middle East, Asia and Australia. Prior to its reorganization last month, Software AG operated through four designated regions globally, with Asia-Pacific falling into a group that also included markets in Northern Europe and South Africa.

"We will rework our business plan for China based on our experience in the next year. We don?t have high expectations for China right now," he told CNETAsia in a recent interview.

In the mainland, the company currently relies on an indirect business model, banking on two partners in Beijing and Shanghai to resell and install its products.

John O'Malley, Software AG's general manager for Asia-Pacific, said the company plans to keep this indirect approach after the company establishes its direct China presence. "We are also looking for a third partner in Shenzhen," he said.

Beyond expanding its alliances in China, the company is looking to beef up its IT services business in selected parts of the region.

"In Australia, we increased our staff strength by about 30 percent," said O'Malley, adding that he is planning to raise the overall number of employees by about 15 percent in Asia-Pacific, largely in the areas of consulting and product integration. The company currently employs 2,500 people in 59 countries.

In countries like Australia and Singapore, currently among the best-performing Asian markets for Software AG, acquisitions of smaller IT services providers could also be on the drawing board, he hinted.

However, the company is scaling back its services push in countries like South Korea, where intense competition is denting profitability, O'Malley added.

"Within Korea, it's very difficult to compete in professional services. Day-to-day services work is handled by a strong partner. We're not looking to expand our professional services and integration team there in the short term," he said.

Due to such cost controls, Asia-Pacific revenue for the company's second financial quarter, which ended June 30, was up 14 percent compared with the same period last year. Regional software license sales grew 76 percent, he said.

Software AG's worldwide license revenue jumped 23 percent to about $36.2 million in the second quarter, and overall sales grew 3 percent to $130.8 million.